Market Update – June 15th

Today’s update is long because there has been a lot of interesting news.  In addition, I didn’t blog on Friday.  My next blog will come out this Friday.


Here’s what I read this past week.


1. A WSJ survey showed that Americans are starting to worry more about the deficit and debt problems. This ranked as the second most important priority that respondents thought that the federal government should give attention to.  It was only surpassed by job creation and economic growth.  Hopefully this will force our politicians to act.  We better get scared before investors become scared of the US.


2. Democratic pollster Mark Mellman described it well when he said that the debt represents wasted money, lack of discipline and long-term economic decline.


3. The World Bank warned that we could have a double dip recession if markets lose confidence in governments’ willingness to pay off their debt.  Nearly half the increase in global demand will come from developing nations.  More mature countries have weak financial sectors.


4. The IMF says that risks to the global economic outlook have risen significantly and policy makers have limited room to provide support for growth.


5. Bernanke testified before the House budget committee and  said that “unless we as a nation make a strong commitment to fiscal responsibility, in the long run, we will have neither financial stability nor healthy economic growth.”


6. Bernanke said that the budget deficit is a big problem, but it’s a bigger problem that the workforce isn’t growing nearly fast enough to pay for all the people who stand to retire over the next two decades.  He said that there must be some plans for restoring fiscal balance.


7. The state of New York (and local municipalities) is having trouble making their required payments to the state pension fund.  As a result, they are going to borrow $6 billion over the next three years.  They are borrowing it from the state pension fund.  In other words, they are meeting the funding requirements, but it is identical to having an unfunded liability.


8. Banks have returned $194 billion in TARP fund and there is $190 billion outstanding.  In other words, more has been returned than is outstanding.  In all, 707 banks received $205 billion and another $331 was committed to other programs (including GM, Chrysler, and expanded bailouts of Citi and BAC).


9. Some TARP money will never be repaid (e.g., $50 billion to provide cash incentives to banks t modify mortgages).  The President has proposed a tax on the banks to recover the losses.


10. The Administration is now estimating losses of only $105 billion from the TARP program.  The Congressional Oversight Panel said taxpayers still “remain at risk for severe losses” due to AIG.  There was $182 billion given to AIG from the Fed, but Treasury committed $70 billion of TARP money to the company.


11. Municipal bond yields may not be reflecting the risk that they hold.  Yields on munis maturing in 2020 are at 3.15%.  While yields have gone down, the cost of credit default swaps has increased.  With that said, just 223 out of 40,000+ issuers defaulted on their debt payments in the past year.  That represented just $6.4 billion  or .002% of outstanding municipal debt.  Of course, we now know that the ratings agencies are not going to help.  In addition, there is a huge amount of unfunded pension liability out there.


12. Household ownership of municipal bonds went over the $1 trillion mark for the first time ever (in Q1). This is 35% of the $2.83 billion market.  In additional, foreign investors have a $71.9 billion position (mostly taxable Build America bonds).  This is 80% higher than the end of Q1 2009.


13. Global corporate default rates declined from 9% in April to 7.5% in May.  Rates have fallen significantly from their peak of 13.5% in November 2009.  On the downside, spreads on junk bonds have increased in the past month.


14. Some argue that the slowdown in bank lending is the result of increased government regulation and taxation.  In other words, banks don’t want to lend to a business that may change significantly.  Unknown regulation makes it impossible to price risk.


15. Bank examiners have also become much more conservative in valuing banks’ assets.  The result is the need for increased reserves.


16. Some people are deciding to pay their credit card off, but not pay their mortgage. The Fair & Isaac Company reports that high FICO score borrowers are defaulting more on mortgages than on credit cards for the first time ever.  For consumers with FICO scores of 760 – 789, .3% defaulted on mortgages in 2009, while only .1% defaulted on credit cards.


17. Transunion reports that in Q3 2009, 6.6% of borrowers were delinquent on their mortgage but current on their credit card.  Only 3.6% were current on their mortgage but delinquent on their credit card.


18. TrimTabs tracks the jobs picture in real time by monitoring income tax deposits at the Treasury.  These have suddenly started falling.  They are actually predicting that the economy will lose up to 200,000 jobs in June.  If correct, it will be interesting to see how the market reacts to this news.


19. Average hourly earnings were up 1.9% YOY.  But, workers were 2.8% more productive (so they got some of the benefit and the company received some of the benefit).  Consumer prices increased 2.2%, so workers didn’t keep up with inflation.


20. The average growth rate of non-census jobs over the past three months has only been 130,000.   That’s about what is needed to keep up with the normal growth in the work force.  It won’t lower our unemployment.


21. Everyone talks about the impact of the stimulus (~$300 billion per year), but almost half of this has been offset by cutbacks (in services) and tax increases at the state and local level.  State and local tax increases will grow after July 1 (when the fiscal year begin).


22. The census currently has provided over 500,000 jobs.  These will be eliminated in late summer.


23. Only 41,000 private jobs were created last month.  It has been estimated that 20% of the 41,000 private sector jobs may be workers hired to clean up the oil spill.


24. What matters more to you: stimulating the economy or controlling the deficit (and living with high unemployment)?


25. In May, 11.3% of workers believed they would see their income rise in the following six months, while 16.6% thought they would see it decline. This is the first time in over forty years that more people believe they will be worse off than better.


26. More people quit their jobs in the last three months than were laid off.  In April, two million people quit their jobs and 1.75 million were laid off.  Quitting a job is a sign of confidence.   (Of course, it may also be a sign of being crazy.)  There is also a backlog of people who have wanted to quit for some time.


27. Purchase mortgage applications fell 5.7% last week.  They’re down 43% since the tax credit ended in April! They are at their lowest level since April 1997.  Think about that…we have historic low interest rates and applications are way down.  This shows the effect of uncertainty in the job market, damaged credit ratings and the home-for-clunkers program that we just finished.


28. Banks repossessed 94,000 homes in May, a 44% increase YOY.  But, the good news is that notices of default (the first step in the foreclosure process) fell 22% YOY.  Some analysts say that this is misleading.  Rather than good news, it merely reflects the fact that banks are full of inventory and are waiting.  There are still five million loans more than 90 days past due.


29. Only 2.6% of borrowers with subprime loans backing 2007-issued bonds who had never missed a payment ended up missing a payment in the past three months.  This is down from 3.7% in February.  Of course, we’re starting to look at a smaller pool of people (2007 subprime borrowers who have never missed a payment).


30. The monthly rate of new delinquencies among all loans in non-agency mortgage bonds fell to 1.2% in May.  That’s the low since 2007, down from more than 2.5% early last year.


31. More than 27.4% of mortgages underlying the $1.5 trillion of non-agency securities were at least 60 days late, in foreclosure or already turned into seized property.


32. French and German banks have lent nearly $1 trillion to the most troubled European countries and are far more exposed to the debt crisis.  French banks had lent $493 billion to Spain, Greece, Portugal and Ireland.  German banks had loaned $465 billion.  In total, Spain, Ireland, Portugal and Greece owe nearly $1.6 trillion to banks in the 16 country euro zone.  This is a combination of government debt or credit to companies and individuals.  The big problem is that we don’t know what banks are at risk.  As a result, no one wants to lend to any of the banks.


33. French banks had $106 billion of Greek debt.  This tells you why they wanted to support Greece.  Private debt is problematic because of austerity measures (which may lead to recession).  The US has less than $200 billion of exposure to Spain, Greece, Portugal and Ireland.


34. It will be interesting to see the impact of Europe on the US.  Combine Europe’s austerity measures and the strength of the dollar and you have to believe that our exports will be hurt. It used to be that people would argue that you wanted to own stocks which had exposure to Europe.


35. Approximately 73% of investors still believe that Greece will default.  Only 23% believe that the $1 trillion bailout will both keep the EU together and prevent a default.


36. Gene Epstein (Barron’s) argues that consumer spending looks okay.  Over the past three months (March through May), every single major category of retail sales rose from the previous three months (up 2.6% overall) and they were above the level of the same period a year earlier (up 8.1% overall).  He also argues that the numbers coming out of the Census Bureau are less reliable than the positive numbers coming out of the Commerce Department.


37. Lance Roberts supplied some reasons to worry about consumer spending and GDP: (A) less stimulus money; (B) the end of the inventory correction; (C) increased savings rate; (D) further decline in real estate; (E) Europe and China slowdown; and (F) cutbacks at the state and local level.


38. China is investing in ports and distribution centers in Greece.  They are using this opportunity to make investments which will help trade.  As a result, the Greeks have a favorable opinion of China.  One deputy minister expressed his view that Chinese invest in real assets while Wall Street is only interested in pushing paper securities.


39. China’s exports increased 48.5% YOY in May, while imports increased 48.3%.


40. With elections approaching in November, politicians are anxious to go after China.  Geithner recently said that the distortions caused by China’s exchange rate spread far beyond China’s borders and are an impediment to the global rebalancing that we need.  It’s hard for Americans to have unemployment near 10% and see China grow faster than 10% (to some extent due to their cheap currency).


41. China’s CPI increased 3.1% YOY in May.


42. From 1994 – 2008, Chinese productivity increased 21% and labor costs increased 13%, meaning that there has been a decrease in per unit labor cost.


43. China’s huge surge in exports will not change their currency thoughts:

1. the dollar has since appreciated against the euro and this will make it harder for China to export
2. these orders were placed before the deepening of Europe’s debt crisis
3. higher wages will make their exports less competitive
4. higher wages will increase Chinese demand for imports

44. In China, new construction starts in May were double last year’s levels, and are up 72.4% so far this year, while developers’ purchases of land were also up 44.1% in May.


45. Only two companies in the S&P 500 have done a stock split this year.  In an average year, there are 49.  Of course, most stock prices are well below their 2007 levels, so it’s unclear to me why we should be surprised by the lack of splits.


46. So far this year, 135 members of the S&P 500 have raised, initiated or reinstated dividends, while only two companies have cut them.  This nets out to a $10.4 billion increase in dividend payouts for the year.  Last year, dividend payouts dropped $39.8 billion.  So far this year, 310 companies have announced buyback programs.  Last year, 253 did this (when stocks were cheaper).


47. All exchanges will now halt trading in an individual stock when its price moves 10% or more, up or down, in the previous five minutes.


48. California passed Proposition 14.  Starting in 2011, California will have general elections (rather than primaries) and then the top two vote getters will face off.  They could be members of the same party.  The idea is that it will force candidates to appeal to everyone.  One other threat is that one party will run only two people and another party will run many candidates and split the vote.  The state of Washington has a similar approach.


49. The government estimate was that 25,000 – 30,000 barrels per day were flowing into the Gulf of Mexico.  Wow, and I really had believed that it was 5,000.  (Note: a barrel contains 42 gallons.) Then, on Friday the federal government said that the oil leak may be 40,000 barrels per day.  When this started, BP’s original estimate was 1,000 barrels per day.


50. As I mentioned in the past couple of weeks, I don’t expect a US company to acquire BP.  My main argument is that I think that the political issues are too great.  British shareholders would truly feel like we had done them wrong.  I think that we’re starting to see evidence that this argument may be right – British sentiment has turned against us and the comments by President Obama (where he has railed against BP).   Personally, I even believe that there is a good chance that the British government would step in and provide a bailout, rather than allowing BP to declare bankruptcy.


51. An interesting article in the NY Times pointed out that Florida has prohibited offshore drilling for many years in order to promote tourism and keep their beaches safe. They haven’t received the financial benefit of drilling, yet it turns out that they share the risk.  A recent study argues that Florida’s gulf coast could lose 195,000 jobs and $11 billion this year alone if the spill cuts tourism in half.


52. Apparently, BP is going to announce that they are suspending their dividend in order to guarantee that they will have the funding available to pay damages for the oil spill. As I’ve said before, I think that the United States has the right to request this.  Put in personal terms…you wouldn’t like it if someone injured your family and then distributed his assets to someone else before you could get a judgment imposed on him.


53. President Obama is getting ready to compel BP to set up a multi-billion dollar escrow account to pay damages.  Apparently, the administration has legal authority under the federal oil pollution act.


54. BP is going to fight the Administration’s demand that BP pay all of the unemployed rig workers who have lost their jobs because of the six month moratorium on off-shore drilling.  The idea that “you caused a spill that caused us to ban offshore drilling and now you’re responsible for everyone who lost their jobs” is absolutely absurd.


55. We almost saw a replay of the AOL / Time Warner merger! If you remember, AOL turned their overpriced stock into real assets by merging with Time Warner.  Time Warner shareholders were killed by this deal.  This past week, the Pac 10 tried to do the same thing.  The Pac 10 tried to acquire some of the best Big 12 teams at a time when the Pac 10’s best team (USC) has lost a tremendous amount of value (due to NCAA probation).


56. While Texas and nine other Big 12 teams decided late Monday to stay put, this whole deal was a true debacle.  We lost two “big name” teams in Colorado and Nebraska.  I love Texas, but it gets old watching them play Baylor, Iowa State, Kansas, etc.  Then, you add in nonconference games against powerhouses like Rice and you’ve got quite the schedule.  The bottom line is that losing Colorado and Nebraska made a weak conference even weaker.  I’m hoping that there is going to be news released about adding some teams that will strengthen the Conference.  With that said, I will be shocked if anything good like that happens.


57. Was I the only one wondering if I England’s goalie was exposed to BP’s oil? That might explain the American goal.

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